Tax Only On Capital Gains From Sale Of Property Received As Alimony In Divorce Proceedings

What are the tax implications on sale of residential house property received as alimony at the time of divorce?  Can a divorcee woman save tax by reinvesting the money?

Answer: The amount received on the sale of property received as alimony on divorce shall not be treated as taxable income in its entirety. The only taxable component will be the capital gains made on sale of such property. For the purpose of computing the capital gains in the cases where the seller himself or herself has not paid for it like in case of gifts, inheritances etc. , the amount paid by the previous owner or owners is to be treated as the ‘cost of acquisition’ for such persons

Whether such asset shall be treated as short- or long-term capital gains will depend on the holding period of you and the previous owner taken together. In case the holding period is 24 months or more, the profits made on it will be treated as long-term capital gains.

Do note that in such cases, though the cost and the holding period of the previous owner is to be taken into consideration, one is not allowed to take the benefit of indexation if one goes strictly by the language used in the law. However, there are some judicial pronouncements that say that indexation should also be allowed from the date when the previous owner had bought it.

Long-term capital gains are taxed at a flat rate of 20 per cent plus cess and surcharge, unless an exemption is claimed. In case the capital gains are long-term in nature, one can claim exemption under Section 54 of the Income-tax Act, 1961, if he/she invests the capital gains for purchase or construction of another residential house property within that specified period. Alternatively, one can invest the capital gains in capital gains bonds of specified financial institutions, too.

Where the combined holding period is less than 24 months, the profits are treated as short-term capital gains, and they will get clubbed with one’s regular income, and will be taxed at the applicable slab rate.

Can I take an interest free loan from my relative to repay my home loan? Is this personal loan taxable at any end?

Answer: There is no restriction from whom one borrows money for the purpose of buying a house or for repayment of an existing home loan. The loan can come with an interest, or it can also be interest-free.

In case you borrow any money on interest from your relatives to repay your existing home loan, you can still claim the amount of interest paid on such loan under Section 24(b) of the Income-tax Act, 1961. It may be pertinent to note that you will not be able to claim any tax benefits under Section 80C in respect of loan repayment, on a loan taken from a relative. This interest free loan from your relative will not be taxable in your hand.

The author is a tax and investment expert

(Disclaimer: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)